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Directors’ overdrawn loan accounts

Loan accounts are increasingly being looked at by HMRC with a view to collecting national insurance contributions (NIC).

Often a director operates his loan account such that regular amounts are debited to the accounts to meet his mortgage, school fees or other living expenses; the amount overdrawn is subsequently cleared by voting a bonus to bring the account back into balance. In HMRC’s view in this situation the director is receiving an advance of his remuneration and so there is a payment of earnings.
HMRC’s view is that NIC liabilities for company directors arise at the earlier of payment or entitlement. This should not increase the NIC due but requires the payment to HMRC to be made earlier.

There are also occasions where a director operates a loan account but on the understanding that he will clear the overdrawn amount by either introducing some of his own income or he will give up or repay a dividend. These overdrawn amounts are not in anticipation of future remuneration and NIC liabilities will only arise if the amount overdrawn is not cleared in full and the balance is written off. Such written off amounts attract liability.

Remember also to Class 1A NIC liability which will arise on the benefit of the loan.



Date: 5th June, 2008
Author: Cathy Corns


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